I think hugolp put it nicely. Sure, the government could print tiny amounts of money as required, and derive it's main revenue from taxation. Strangely enough, it never happened in history. The government will always abuse the money creation privilege by treating it as a revenue source (which is not!), and unleash hyperinflation. Always. The only way for fiat to work is it's issued by an independent central bank, and the government behaves just like a normal borrower on the market: if it needs more money that it can tax, it needs to find lenders, and appear trustworthy to them.


The only reason the govt. has any ability to borrow at all is precisely because the market expects it to treat it as household debt, i.e to tax and pay it back as opposed to simply print it into existence. Without that guarantee nobody would borrow money to the government. Nobody lends money to Zimbabwe in zimdollars: Mugabe's only option is to print more zimdollars or borrow in foreign currency. The Fed could monetize all 15 trillions of debt, yet it does not because it would create massive inflation, and that's against the Fed's raison d'etre. The slightest hint of such a strategy (default in real terms) would sent bond values to zero and prof. Krugman will have the dubious pleasure to meet those "bond vigilantes" whose existence he so adamantly denies.